Germany Tax Deductions

1. Personal Income Tax (Einkommensteuer) Deductions:

• Donations (Spenden):
  • Donations to recognized charitable organizations are deductible, up to 20% of gross income.  
  • Business Expenses for Employees (Werbungskosten):
  • A standard annual deduction of €1,230 (for 2023, this number is subject to change) is allowed without documentation.
  • Higher amounts can be claimed with proper documentation.
• Child Allowance (Kinderfreibetrag):
  • An annual tax allowance is granted for each child.  
  • It is important to check the current amount, as it is subject to change.
• Insurance Payments (Versicherungsbeiträge):
  • Certain life insurance, health insurance, and other insurance payments are deductible, subject to limits.  
  • Unemployment Insurance (Arbeitslosenversicherung):
  • Contributions are deductible, subject to annual limits.
• Alimony (Unterhaltsleistungen):
  • Deductible up to a certain annual amount.
• Church Tax (Kirchensteuer):
  • Fully deductible.
• Travel Expenses to/from Work (Entfernungspauschale):
  • Deductible up to a certain annual amount, based on distance.
• Mortgage Interest (Zinsaufwendungen für Immobilien):
  • Can be offset against rental income.
• Home Office (Arbeitszimmer/Homeoffice-Pauschale):
  • Certain costs relating to a home office are deductible.
• Professional Travel (Reisekosten):
  • Fully deductible.

2. Corporate Income Tax (Körperschaftsteuer) Deductions:

• Offset of Losses (Verlustvortrag/Verlustrücktrag):
  • Losses up to €1 million can be carried forward indefinitely.
  • Losses exceeding €1 million can be carried forward, but only up to a certain percentage (currently 60%).
  • Loss carryback is possible for a limited period, subject to regulations.  
  • Changes in ownership can impact the ability to carry forward losses.  
• Transactions Between Associated Parties (Verrechnungspreise):
  • Transactions must adhere to arm's length principles.
  • Tax authorities closely scrutinize transfer pricing.  
• Consolidated Statements (Organschaft):
  • Parent companies can file consolidated tax statements for subsidiaries.
  • Requires a profit and loss transfer agreement for at least five years.  
  • The parent company must hold more than 50% of the voting rights.\
• Financing Expenses (Finanzierungsaufwendungen):
  • Interest expenses are deductible up to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization).  
  • A safe harbor rule applies for interest expenses up to €3 million.
• Depreciation of Fixed Assets (Abschreibung von Anlagevermögen):
  • Straight-line depreciation is the standard method for movable assets.  
  • Straight-line and declining-balance methods are used for buildings.  
  • Depreciation rates vary by asset type.
• Asset depreciation percentages:
  • Aircraft: 5%
  • Vehicles: 16.6%
  • Computers: 33.3%
  • Office Equipment: 6-14%
  • Machinery and Equipment: 6-10%

3. Key Considerations for Foreign Investors:

• Documentation:
  • Maintain thorough records to support all deductions.
  • Tax Treaties (Doppelbesteuerungsabkommen - DBA).
  • Understand the impact of relevant tax treaties.
• Compliance:
  • Adhere to German tax laws and regulations.
• Professional Advice:
  • Seek advice from German tax professionals.
• Up to date information:
  • German Tax law is subject to change, so ensure you have the most current information.